ETtech Explainer: how rising US interest rates caused a pincer movement on Silicon Valley Bank

A slew of developments coming together, starting with the Silicon Valley Bank (SVB) Financial Group announcing steps to shore up capital after suffering losses on its securities portfolio, has sent ripples across the tech investment ecosystem, and has unnerved prominent venture capitalists. What happened at SVB has its genesis in the rising interest rates, and while the bank would have been able to bear a single shock, it was subjected to stress from two different directions.

Here’s a breakdown of how events transpired at one of the largest Silicon Valley banks:

What is the SVB and how big is it?

SVB is a Santa Clara, California-based lender that focusses on Silicon Valley and tech startups. According to Bloomberg, the company has business with nearly half of all the US-based venture-backed startups, and about 44% of the US venture-backed tech and healthcare companies that went public last year.

The SVB Financial Group, which is the parent company of the bank, reported a net income of $1.51 billion for 2022, a 14.75% decline from the year ago period. In terms of the local deposits, SVB is among the largest lenders in Silicon Valley.

What transpired over the last two days?

On Wednesday, the SVB Financial Group announced that it was raising $2.25 billion in a share sale in addition to having sold $21 billion worth of securities from its portfolio. The bank also said it booked a massive after-tax loss of $1.8 billion on sales of these investments. This led to solvency fears with the lender causing a ripple-effect into its customers pulling out deposits. Alongside the troubles at SVB, another bank focussed on the cryptocurrency market Silvergate Capital Corp, said on Wednesday that it headed for a collapse following the selloff in crypto markets. This led to a run on the bank forcing it to sell billions of dollars worth of assets at huge losses.

How did US startups react to this?

According to a report by the Wall Street Journal, venture-capital investors have advised startups to pull their deposits from SVB.

The report also cited an internal message circulated by Y Combinator president Garry Tan to the programme’s founders, in which he has written: “We have no specific knowledge of what’s happening at SVB. But anytime you hear problems of solvency in any bank, and it can be deemed credible, you should take it seriously and prioritise the interests of your startup by not exposing yourself to more than $250K of exposure there. As always, your startup dies when you run out of money for whatever reason”.

Other large investors including Peter Thiel’s Founders Fund and Coatue Management have also reportedly instructed their portfolio firms to reduce their exposure to SVB.

What led to this crisis?

With the US Federal Reserve raising interest rates aggressively to rein in inflation, the value of existing bonds that were issued at lower interest rates has fallen. Banks, which own these bonds, are as a result of the falling values, sitting on steep unrealised losses.

While this is a typical phenomenon in a changing interest rate cycle, the problem arises for banks when they are forced to sell these securities to cover for withdrawals in deposits. Another facet of the rising interest rates was the decline in funding for startups as the venture capital ecosystem took its foot off the gas pedal.

The funding crunch faced by these startups, which are clients to lenders such as SVB, caused a decline in deposits to the level that was unexpected.

How does SVB tie into this?

The WSJ report said that unrealised losses on bond investments had been piling up at SVB throughout last year. Further, it said that unlike most other large banks, which serve a variety of companies and range of assets, SVB as well as Silvergate were focussed on specific segments that increased the risks for them in a downturn.

What happens next?

The rout in SVB’s stock price — 60% on Thursday — led to other US bank shares also falling. Following the fear of a possible insolvency situation among depositors, SVB chief executive officer Greg Becker reportedly held a call on Thursday in an attempt to inform the bank’s customers of its health, while urging them to not pull their deposits or spread panic about the lender’s situation.

What remains to be seen is whether SVB’s $2.25 billion fundraise that is planned through a combination of selling common and preferred stocks is enough to bring it on to stable ground.

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